Federal employees who are going unpaid because of the partial government shutdown do not need to worry, at least for now, about being declared in default on loans they have taken against their Thrift Savings Plan retirement savings accounts, the TSP said Wednesday.
The 401(k)-style program allows federal workers to borrow against their accounts either for general purposes or for a primary mortgage; they repay those loans through payroll withholding. However, no such withholding can be made if the employee is in unpaid status, whether furloughed or still on the job but without pay.
The next federal employee pay distributions are to be made later this week or early next week for the Dec. 23-Jan. 5 pay period, two weeks for which about 800,000 employees were in unpaid status.
Those who have been kept on the job without pay are assured that they will receive back pay when funding is restored, and legislation pending in Congress also would provide back pay for those who are furloughed. However, when that would happen is unknown, raising concerns about potential defaults on TSP loans. If a loan is declared to be in default, it is considered a taxable distribution to the investor and also in many cases, subject to a 10 percent early withdrawal penalty.
That would not happen until at least two payments were missed, and the borrower is notified and given the chance to get current on the loan, however.
“If your loan payments were up to date prior to the furlough, missing one or two payments will not cause your loan to be in default,” the TSP said in an online posting. “As long as retroactive pay is approved, all missed loan payments will be submitted and posted to your loan.”
Counting both federal employees and uniformed military personnel — who also are eligible for the TSP but who are not affected by the partial shutdown — nearly 890,000 loans are outstanding, of which about 740,000 are general purpose loans and the rest home loans.
The TSP further normally does not allow employees in unpaid status to take out new loans, although it allows an exception for shutdown situations because of an expectation that the employee will be back in paid status by the time the repayments would start. Account holders also may be eligible for withdrawals because of financial hardships but must document their need, a requirement that does not apply to taking out a loan.
“We have not seen an uptick in loan or financial hardship withdrawals,” TSP spokeswoman Kim Weaver said in an email. “The call volume has ticked up a little bit but is still within what we would consider normal.”
The TSP is a self-funding agency and is not affected by the partial shutdown.
Another consideration for employees affected by the shutdown involves their regular investments. Because those investments also are made through payroll withholding, they cannot be made for employees in unpaid status.
For those under the Federal Employees Retirement System — more than nine-tenths of federal employees — employer contributions also are not made, because they are based on salary received. FERS employees receive a contribution of 1 percent of their salary automatically, regardless of whether they invest, and also are eligible for matching contributions of up to an additional 4 percent of their salary.
Once those employees return to paid status, their personal investments and agency contributions will be made retroactively from the back pay issued, Weaver said. Employees under the older Civil Service Retirement receive no government contributions.